When thinking about buying, one of the questions that many buyers have is 'what is happening with mortgage interest rates?' As a seller, the movement of interest rates also is a factor in how motivated buyers are to buy. Many people are questioning what will happen to interest rates in the next year. At the beginning of 2013 interest rates fluctuated between 3.25 and 3.5%, began jumping during summer up to around 4.25-4.5%. During the latter stages of autumn they have been dropping back to around the 4% mark. This movement can be seen in the graph below. To understand why this is happening first we need to generally understand how interest rates are impacted by the Federal Reserve and its policies.
Since 2009 the American Recovery and Reinvestment Act, the Stimulus plan, has been in operation to stimulate the economy. One of the objectives of the Stimulus plan has been to pump more money into the financial markets by buying certain Bonds. This has the effect of keeping interest rates low. Just prior to the interest rates jumping earlier in the year there was speculation that the Federal Reserve was going to taper off the purchase of bonds, and on the anticipation of this occurring interest rates increased up approximately 1% point quite rapidly. When the Federal Reserve decided not to announce the tapering off of the bond purchase program back in the September 2013 Fed meeting and also in the October 2013 Fed meeting, interest rates began to fall again. You can see this in the graph below.
The Fed is looking at different indicators in the economy to determine when the Stimulus can be modified, and different analysts are predicting that this will occur very soon, possibly even by the December 2013 or January 2013 meeting of the Fed. Once the tapering off of the bond purchase program is announced, interest rates will start to rise.
What will this mean to buyers and sellers? The Mortgage Bankers Association believes that rates will keep pushing upwards going well above 5% by Q4 2014. This is a consistent belief amongst the four major projectors of interest rates. Mortgage Bankers Association, Fannie Mae, Freddie Mac, and the National Association of Realtors are all projecting interest rates to be above 5% by Q4 2014. See the chart below.
As a buyer one impact is fairly obvious. With rising interest rates, the amount the buyer will be qualified to borrow will decrease due to the rising interest rates. For example, if a buyer today borrowed $250,000 at an interest rate of 4.2% their repayment of principal and interest would be $1,225. In 12 months time, with a potential increase of 1% in interest rate, the principal and interest repayment on the $250,000 loan would be $1,388 - a difference of $163 per month, or $1956 per year. If we did not have severe shortages in some of our markets, an increase in interest rates would depress buyer demand with a resultant depression of prices. With many of our markets experiencing severe shortages of inventory the impact of rising interest rates will result in a decrease in the rapid appreciation we have been seeing and a return to the appreciation we would expect in a normal market - we will still have prices appreciating but not at the rate they appreciated in 2013.
For a seller there will be two effects of the increasing interest rates. Most sellers will more than likely also be 'trade-up' buyers as more homes are coming back into the positive equity realm with regard to their home. So, not only will there be a slightly lessening demand for their home as buyers who could afford their home with today's interest rates may not be able to afford their home with next year's interest rates, but they will also be impacted by the higher interest rates on their new mortgage.
So, what is the recommendation if you are thinking of buying or selling in the near future? Given the probability of the Fed announcing the tapering off of their bond purchase program soon, the sooner you action these plans the better. The market is still responding vigorously to the limited inventory on the market and we are still seeing competing offers on homes even in this traditionally slower season of the year. Don't ease off the search during winter because if you find a home you like, then buying and/or selling sooner will mean that you will be less impacted by the rising interest rates that are projected for next year.
If you would like an estimate of what your home would sell for in today's market I would be more than happy to come by, have a look at your home, and then provide a CMA (comparative market analysis) which will provide you with an estimate of what your home should sell for, along with a marketing plan to get maximum exposure for your home.
If you'd like to chat more about the topic presented here, or the Real Estate market in general, then please call me on (617) 997 9145, or email me at Dani.Fleming@MAPropertiesOnline.com.